A Spectrum of Possibilities (Probabilities)

Valuation works over long time periods.  In the short term, anything can happen.  The US market was slightly expensive at the end of 2012, but lo and behold it returned over 30%.  Below is a fun chart of yearly CAPE values back to 1900 and future 1o year returns, and I will keep the commentary light as the conclusions should be fairly self evident.  Notice most of the red and yellow years end up on the left side of the chart of low returns, although there are some on the right side.  And vice versa with the green ones.

Most investors like to think in binary terms.  Stocks are either cheap and a buy, or expensive and a sell (or crash!!!).  I’m convinced they think this way along the same lines they like to cheer for sports teams (it’s more fun).  I tell investors using valuation is a spectrum of future possibilities.  While buying expensive markets generally will produce lower future returns, you will have positive outliers.  The same for cheap markets, it’s usually a good idea but they can always get cheaper.  

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Checking in on the Tiger (Cubs)

I sent out a fun piece by Novus to Idea Farm subscribers last month called Like Tiger, Like Cub.  The piece took a deep dive into the Tiger Cubs, and we have written about plenty about Tiger and offspring on the blog before as well as in our first book The Ivy Portfolio.

I thought it would be fun to check in on how they are doing.  Below we take the five most popular holdings across 21 Cubs, rebalanced quarterly 50 days after the quarter.  This simple portfolio has whalloped the market in years past by over 10 percentage points per annum since 2000.    Since publication of Ivy, this portfolio would have outperformed the market four of the past five years.  Not bad!

What do they hold right now?  A full third of the 21 Cubs all own the stocks below in the second chart.

Source: AlphaClone

AC

 

 

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Book Offer

If UVa beats MSU Friday I’ll send my readers a free book.  If they make the Final Four I’ll double up and make last two books free.  

GO HOOS!!!

Why Value Investing is So Hard (Russian Edition)

Disclosure: Funds I manage and clients own Russian stocks and ETFs.

Many times on this blog I’ve mentioned that for every investing strategy there needs to be a fundamental reason why it works.  A basic, “explain to your 12 year old niece reason why it works”.  Value investing, at its most basic, is buying $1 for $.80 (or less than intrinsic value).  Most of the alpha out there (or smart beta or whatever it is being called these days) is either hard to find or hard to DO.  And by do, I mean it goes against everything your behavioral instincts tell you to do.  Buying a stock at all time highs is hard to do, and one reason momentum and trend work.  Buying a value investment is hard for many reasons, a few of which I outline below with a very relevant current example, Russian stocks. 

1.  All of the headlines are negative.

2.  The investment has declined, usually by A LOT. 

3.  All of the trailing fundamentals are really bad.

4.  People can find many reasons why “this time is different” for the value metrics not to be reflective of the current situation.

5.  There is a non-zero risk of the investment going to zero.

6.  It is not popular (or patriotic) to own the investment.  

7.  Buying the investment, and it going down more,  would pose serious career risk. (or divorce risk).

8.  The banking consensus is all sell rated.

9.  Flows are out.

Russia checks all of these boxes and then some.   

For the same reason we recommend to never put all your eggs in one basket with a single stock, the same goes for countries too.  If you plan on value investing with countries it makes sense to buy a basket rather than just one or two.  As was the case with Greece going to a CAPE of 2 in 2012, Russia could easily get cut in half again.  But secular bears set the stage for secular bulls, and vice versa.  Off to pizza in Phoenix.

LA Talk

If you’re local in LA, S&P is hosting an event for financial advisors at the Montage on April 10th, come join!  I plan on tossing a book in all the goodie bags.

   

DETAILS

LOCATION:
Montage Beverly Hills Hotel 
225 North Canon Drive
Beverly Hills, CA 90210 

LUNCH/REGISTRATION: 
12:00 - 1:00 P.M.

FORUM:
1:00 - 5:00 P.M.

COCKTAIL RECEPTION:
5:00 - 6:00 P.M. 

 

New Book is Out!

My new book is finally available on Amazon!  Here is the link:

Global Value:  How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market

We self published it in the same format as Shareholder Yield, although it is longer around 80-90 pages. 

I would recommend reading it on a device (computer, iPad, Kindle Fire) that supports color, as there are about 40 charts and figures. As always, all the subs of The Idea Farm get a free copy.

A physical version will likely be out in a week or two once I see the proofs.

Let me know what you think, and as always, please leave a review on Amazon!

Here is the book homepage www.globalvaluebook.com , and below is a short description of the content.

Summary blurb:

Investment bubbles and speculative manias have existed for as long as humans have been involved in markets. Is it possible for investors to identify emerging bubbles and then profit from their inflation? Likewise, can investors avoid the bursting of these bubbles, and the extreme volatility and losses found in their aftermath to survive to invest another day? 

Over 70 years ago, Benjamin Graham and David Dodd proposed valuing stocks with earnings smoothed across multiple years. Robert Shiller later popularized this method with his version of the cyclically adjusted price-to-earnings (CAPE) ratio in the late 1990s and correctly issued a timely warning of poor stock returns to follow in the coming years. We apply this valuation metric across more than 40 foreign markets and find it both practical and useful. Indeed, we witness even greater examples of bubbles and busts abroad than in the United States. We then create a trading system to build global stock portfolios, and find significant outperformance by selecting markets based on relative and absolute valuation. 

 

Global Value - final 1563px X 2500px

Recent Tweets

Until a time comes when the Abnormal Returns for Twitter launches, every month or so I’ll post my favorite Tweets and links below from @MebFaber

 

 

New Book (#3) Out Soon

It’s awfully nice out in SoCal so I may not finish this weekend, but my new book should be out in the next few weeks.  As always, will send a free copy to Idea Farm subs when it launches…stay tuned!

Two other books that just came out on the way are: Tail Risk Hedging & Rule Based Investing

 

 

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CAPE Valuation Bollinger Bands

I was trying to do everything to avoid going to the gym last nite so I put together this chart.  25% cheapest, 25% most expensive, and average of all countries and their CAPE valuations.  2nd chart includes the US.  It’s almost like a valuation Bollinger Band that could be used to adjust your domestic vs. global stock weightings.

Look at the only times the US has been at or near the bottom 25% – the early 80s (start of greatest bull in US) and perhaps 2009.  Now?  Above the highest 25%!

Right now, your allocation would be very heavy globally in markets that are broadly very cheap.

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Newton’s Revenge

Being a currency buff, I have always found Bitcoin and all of the other “alternative” currencies to be interesting, and a pleasant distraction.  A few months ago the price action seemed to suggest similar properties as many speculative bubbles do, so I penned a piece that compared Bitcoin to the South Seas Bubble.  I even went as far as to setup an account on CoinBase and accept Bitcoin deposits for The Idea Farm, but everyone seemed to prefer good old credit cards so I took it down.

I thought it would be interesting to update the chart with the recent price action…are we about where Newton went broke?

 

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